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Market Bulletin - Falling star

13 August 2018

The Trump administration ratcheted up trade tensions, as emerging markets were hit by worries about Turkey’s currency crisis.

The Hollywood Walk of Fame comprises more than 2,600 five-pointed terrazzo and brass stars embedded in the pavements along Hollywood Boulevard and Vine Street. If the local city council had its way, the one honouring Donald Trump’s work on Miss Universe and The Apprentice would be removed. Last week, its unanimously approved resolution cited the US president’s “disturbing treatment of women” and “other actions”. On the latter point, after another week of tariffs, threats and sanctions, a number of other world leaders may share the council’s view.

Global powers were quick to condemn President Trump’s decision to reimpose sanctions on Iran, which he claimed was to help secure “world peace”. The first wave kicked in on Tuesday, with more to come in early November. The US also threatened to stop doing business with any country that continued to trade with Iran; a warning the European Union encouraged companies to ignore.

The UK government also made clear its disagreement with the US move, and there were warnings that it threatened havoc for the world’s finely balanced oil market. Washington’s sanctions will halve Iran’s oil exports by November, leaving supply safety buffers lower than during the two great oil shocks of 1979 and 2008. Added to other global supply challenges, it raises the risk of an escalation that could see the price spike to $150 or more next year, which would have dire implications for the world economy.

The tit-for-tat trade war between the US and China saw another round of retaliatory moves last week. Beijing followed Washington by announcing a 25% charge on goods, worth $16 billion, due to come into effect on 23 August. While President Trump claimed the “tariffs are working big time”, China reported a jump in exports in dollar terms last month, suggesting the tariffs imposed by the US in early July have yet to have a major effect on global trade flows.

“We take the purist economic view that history has shown there will be no winners [from a trade war] …At some point, Trump will realise that his policies serve only to increase prices, reduce demand, and cost the US economy growth and jobs; after which he will be forced to engage reverse,” said Rowan Dartington’s Guy Stephens, expressing the view (and hope) of many.

But there is no sign of that yet. On Friday, President Trump doubled tariffs on Turkish steel and aluminium in an escalation of a diplomatic rift between the countries. This compounded rising fears that Turkey is sliding into an economic crisis. The Turkish lira has lost more than 40% of its value against the US dollar this year and hit a new low last week, exacerbating fears that Turkish companies that borrowed heavily to finance the country’s construction boom will fail to repay foreign currency loans. The ripple effect of the crisis was felt in other emerging market currencies and equities, and there were sharp falls in the shares of European banks exposed to Turkey.

Russia wasn’t spared either from the US administration’s enthusiasm for sanctions, as it announced new measures in response to the Novichok poisoning in Salisbury in March; a decision which was at least welcomed in the UK. The Russian rouble slumped to its lowest level since November 2016. Predictably, Russia threatened to retaliate.

Weather watch

Although ‘news’ that cheese and onion crisps are under threat seems unlikely, there is no doubt of the validity of warnings from farmers’ representatives that the prolonged UK heatwave has damaged vegetable crops, with potatoes and onions the worst hit. Shortages of other vegetables, such as lettuce, broccoli, peas and carrots, helped drive up food price inflation to 1.6% in July – up from 1.2% in the previous two months.

And whilst the hot weather spurred people into buying fans, food and drink, it evidently put shoppers off browsing in shops, as the British Retail Consortium confirmed a slowdown in retail sales last month. It was just another of the challenges faced by high street retailers. On Friday, House of Fraser went into administration before Mike Ashley’s Sports Direct agreed to buy the struggling store chain for £90 million, providing some relief to its 17,500 employees.

Just as the snow was a contributing factor to the weak figures for UK economic growth in the first quarter, so the warm weather in the second quarter provided a boost to growth, most notably in the construction and services sectors (the latter of which accounts for nearly 80% of the UK economy). The economy expanded by 0.4% compared to 0.2% for the first three months of the year. The Office for National Statistics also noted the positive contribution of World Cup celebrations.

Views were split on whether the data vindicated the Bank of England’s recent decision to raise interest rates. Although there are signs that the UK economy has maintained this pace of growth so far this quarter, the potential for Brexit uncertainty to intensify in the next few months is an obvious risk.

Tech talk

Hot on the heels of Apple’s achievement last week, Amazon was racing towards becoming the second member of the trillion-dollar club, as its shares hit a record high in the middle of the week. However, highlighting again the disparity between the fortunes, and tax bills, of high street and online retailers, Chancellor Philip Hammond repeated a call for the likes of Amazon and Google to face a tax on revenues rather than profits.

But the tech headlines of the week belonged to Tesla boss Elon Musk, who dropped a Twitter bombshell on Tuesday by declaring he wanted to take the company private, in a deal valuing the company at $70 billion. Despite doubts over how the deal would be funded, and whether Musk was therefore serious about the buy-out, Tesla’s share price shot up by 11% before falling back later in the week.

Musk has long bemoaned the activities of short sellers, who sell borrowed shares and then seek to profit by buying them back at a lower price. Tesla is the most shorted US company, with about a quarter of its stock on loan to speculators; and short sellers racked up paper losses of $1.3 billion on Tuesday after the shares surged. Over the weekend came news that investors had filed a lawsuit against Musk, alleging he has misled the market.

Deal or no deal

Rising investor anxiety over the possibility of a hard Brexit saw the pound fall to its lowest level against the dollar and euro in nearly a year. The on-target GDP figures did nothing to boost sterling against the dollar, although it recovered slightly against the euro. A weaker currency is good for exporters and the domestic tourist industry, but bad news for imports and those going abroad for their holidays. Whilst it also benefits the international revenue streams of FTSE 100 companies, higher energy bills and petrol prices resulting from a strong dollar will put further pressure on UK consumers.

At the end of the week came reports that EU leaders were discussing a Brexit compromise that would allow UK access to the single market for goods while accepting all future EU environmental and social protections; something which Eurosceptics say is “not Brexit”. It is a first sign, though, that the EU27 countries are finally engaging with Mrs May’s Chequers plan, and means that all eyes will now be on the Brexit negotiations, which resume on Thursday next week, and the Salzburg summit next month.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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